The Government has landed on an alternative to Labour’s water reform programme in Auckland, with a plan to financially separate Watercare from Auckland Council.
Prime Minister Christopher Luxon announced the new arrangement alongside Mayor Wayne Brown and Local Government Minister Simeon Brown on Sunday afternoon.
The Government will pass a law which prohibits the city council from providing any financial support to the water entity and requires it to tell lenders it doesn’t have a Crown guarantee.
Auckland Council would retain control of the entity, in that it can still appoint its leaders and set the remit, but it would not be able to contribute to its costs.
This means the council would be unable to intervene if the entity became financially distressed. Central Government would be under no legal obligation to rescue the entity but would be able to do so if it chose.
Investors often interpret these quasi-independent entities as having an implicit Crown guarantee, as it is highly unlikely that a Government would be willing to allow such an essential service collapse.
Separating Watercare’s assets and liabilities from Auckland Council gives both entities more headroom under their respective debt limits and allows lower rates to be charged today.
The downside is that Watercare will now face higher borrowing costs similar to other unsecured utilities, such as Chorus, and any extra costs will be paid by water users.
Kieran McAnulty, Labour’s local government spokesperson, said the deal with Auckland will mean higher water charges than would’ve happened under the Affordable Water plan.
“The Auckland/Northland entity would’ve had a credit rating of AA, while Watercare will be BBB at best, so the cost of borrowing will be larger”.
Even so, this plan wouldn’t work anywhere else in the country, he said.
Low hanging fruit
Striking a deal with Auckland should be the easy part for Local Water Done Well as the city has a large population and was already doing a good job of investing in its water infrastructure.
The challenge for Simeon Brown and his officials will be finding equally satisfying arrangements for those that lack the financial heft to fund upgrades.
Labour’s water reform was intended to rescue weaker councils by bundling them into larger regional entities that were better able to cope with infrastructure costs.
Auckland would have been buddied up with Northland councils, some of which have significant problems to be dealt with.
Mayor Wayne Brown was very clear that New Zealand’s largest city was not willing to rescue its weaker neighbor.
“Wellington didn’t need to create complicated new structures that diluted the democratic accountability for water services and they didn’t need to merge us with other councils, whether we wanted to or not.”
“Aucklanders didn’t need to pay for someone else’s bad planning,” he said.
Under the deal, Watercare will be able to borrow an extra $190m next year and $1.9b over ten years, which will help ratepayers from being hit with an upfront water rate hike as the cost will be spread out.
Simeon Brown said Auckland needed a bespoke solution as it was so much larger than other councils and couldn’t achieve balance sheet separation by forming a regional entity.
The minister said other solutions for other councils were being developed and would be announced soon.
Smaller councils are likely to have to form regional groups, similar to what was proposed in Labour’s water reform bill, although they get to lead the decision.
Sam Broughton, president of Local Government NZ, said Auckland’s arrangement balanced democratic control with financial sustainability but wouldn’t work for everyone.
“We hope there will be an openness to finding solutions outside of Auckland for all New Zealanders. Water infrastructure is a key priority for councils,” he said.
An earlier version of this story incorrectly reported the Crown would be unable to financially support Watercare. While the Government won't guarantee intervention in a crisis, it would be able to do so if required.
90 Comments
"This ultimately means that if the entity were to fail, its assets would be handed over to debtors with both local and central Government unable to intervene by law."
So if Council and the government can't support it financially? We have privatisation, correct? I don't recall voting for privatisation of water assets?
You're letting your lack of understanding of finance show here, if lenders know the government will bail out the entity then the entity is able to borrow debt more cheaply. If one international lender is unwilling to give them cheaper debt to account for this guarantee, then other lenders certainly will...
Watercare should be able to borrow at cheaper than other BBB rated entities as a result...
If they still get 'loaded up with expensive debt' then that's a governance failure, possible under any structure, and arguably more likely the poorer and less transparent the appointment mechanisms. Best-in-class, or even 'average' private sector corporate governance processes are infinitely better than appointments based on race and not merit.
"You're letting your lack of understanding of finance show here ... "
Was that necessary? More so as I don't think you fully understood what I said, and also your apparent ignorance of past practices when lending to utilities around the world. Utilities are prime assets as they are monopolies for the most part.
"... if lenders know the government will bail out the entity then the entity is able to borrow debt more cheaply. "
Your comment refers to debt when kept low and within realms of being realistically paid back. (The lenders don't actually want it paid back, they want a steady growth in debt as that's how they make their money.)
It does not take account of the slow steady increases in debt ratios when nobody is watching and management has convinced themselves "just a little bit more" debt won't be a problem. This usually occurs when interest rates are low. Then interest rates rise and all the debt suddenly gets very expensive. And at this point a 'crisis' is manufactured where either a) government bails them out, or b) the assets are sold. In either situation the lenders make off like bandits and the public get screwed.
Jesus, this is awful. There are three benefits to this approach:
- Govt get to keep debt off their books to hit an arbitrary and foolish debt limit target.
- Auckland Council avoid getting closer to their similarly foolish borrowing limits.
- Private financiers get a return on investment that will be 200 - 500 basis pts above the amount they would get on Govt / Local Govt bonds.
So, who pays for these benefits? Aucklanders - those extra borrowing costs will play through to their water bills. Literally, tens of millions of dollars diverted from the wages of ratepayers to private financiers. It's madness.
I don't really want to go through a list of or lodge an OIA, but would I be right to assume that this information wouldn't be accessible without doing so?
I've read advice claiming reductions in financing costs being around 130-150bps, but never anything claiming a specific cost increase from an end user's perspective. If the assumption is that the taxpayer would pay then that makes sense, or is the advice from 2020 already so out of date?
The information from 2020 to 2022 is on the Treasury website as a very long OIA response - here you go:
https://www.treasury.govt.nz/publications/oia-response/information-rela…
I don't know how different the new Govt scheme for Auckland is, but it looks very, very similar to the Watercare 'goes early' scheme considered by Labour Govt in 2020 and 2021. It looks like officials didn't like the scheme because it set a precedent that wouldn't work in other areas.
Also note that Govt sought advice on a much cheaper financing route (crown borrowing) but Treasury hated the idea because it took debt on to Govt books.
We don't really know how similar they really are - but it's most likely going to be almost identical - officials don't like doing the same thing again.
I took a look but couldn't find the 2% figure claimed by McAnulty, do you know in which document it's mentioned?
Yes, there is a table in the big OIA document that sets out the scenarios. There are three possibilities as far as I can work out:
- Direct Crown funding (credit rating is same as Govt obvs)
- Strong Govt Support - the liquidity facility (emergency loan) and insurance that Labour were planning for 3W
- Weaker Govt support - assumed that Govt will step in but no provision made to do this (bbb-)
The 200pts spread will be between two of these options I am guessing.
Right, but this is all in relation to financing costs rather than end user charges. I'm not debating whether or not it would be a cheaper option in terms of direct incurred costs, but there seems to be no evidence supporting McAnulty's claim that "water prices would only have increased by 2 per cent".
The total financing cost would've been lower, not necessarily Auckland's bill under the new proposed entities. It isn't inconceivable to see how water bills could increase for Aucklanders given we would be paying for Kaipara's dams.
I'd like to see evidence showing the 2% figure, especially since it was claimed to be the increase in water charges for FY24/25 - not just the difference between various financing options. Politicians get too much leeway nowadays and aren't called up on pulling numbers out of their ass - which I think might be the case here.
All the more reason why Watercare's expertise should have been spread around.
And I'd hasten to add that in the same way central government's balance sheet would have benefited all water authorities, Watercare's would have benefited Kaipara.
It is damn hard to build for the longer term when you are provided with nickels and dimes. And that - in a nutshell - is why smaller water authorities appear 'badly managed'. Or put another way, enduring, quality assets cost heaps, and if they have no money, then stop gaps become the only solutions.
Indeed it is awful...and at some point in the future will lead to either a taxpayer bail out or privatisation.
However Labour wasted their opportunity to create something better and so the people will pay for that across the spectrum political ineptitude.
The same applies to the multitude of problems facing us as a country.....and a lack of competence to vote for to address it.
They should have extremely predictable income, unless they are financially incompetent (not impossible) I don't see them needing bailing out or privatisation. You are missing the most likely outcome of Aucklanders simply paying more for water than they would have done otherwise.
Upgrades for the people of today, paid for by the people of tomorrow.
"They should have extremely predictable income" ... Indeed they do.
But what they don't have is extremely predictable expenses !!!!
Thanks to things like weather events and central banks who think raising the cost of their borrowing is a good thing for everyone. Lenders know this and I have every expectation Watercare will be privatized at the earliest opportunity following a "surprize" debt crunch. This is Goldman Sachs 101. Those that do not study history are doomed to repeat it.
They are plenty large enough to hedge their borrowing so shouldn't be impacted by short term increases in interest rates. Obviously higher rates will flow through, but in a slow and fairly predictable way.
Operating expenses - I don't know enough about their business to comment on really. I guess a couple of dams bursting or a bunch of pipes leaking could get costly, but seems a reasonable chance the government would step in to help pay for emergency recovery (they do for everyone else these days).
So, who pays for these benefits? Aucklanders - those extra borrowing costs will play through to their water bills. Literally, tens of millions of dollars diverted from the wages of ratepayers to private financiers. It's madness.
So essentially this is another way to tweak the books to make the government books look better, while passing the assets and management to a private company supplying a good that is essential to life, who can imply kick the can on maintenance as mentioned in another recent article, so their profits are larger, then sell it off once the maintenance comes due and the taxpayer will likely inadvertently pickup the bill?
this is so RW playbook, run it badly, load it up with debt then when it goes belly up sell the assets to private investors.
last one they did this to was solid energy, loaded it up with debt and both major parties took dividends out of the company that were unsustainable, so when the downturn came in coal price they let it go bellyup
now bathhurst resources own all the mines
I strongly suspect that the Watercare deal is a variant of an approach that Labour considered in 2020/21. It was basically the same and included a backing from the Govt in the form of emergency loans (liquidity facility) and some insurance cover. This backing was enough to give the credit agencies confidence that the Govt would step in if the new entity got into trouble. So, S&P provisionally gave a very high AA+ rating for the entity's debt. Critically for Grant, the emergency loan (liquidity facility) got the credit rating up without Govt having to put the entity's debts on its books - therefore keeping Govt to GDP low.
Treasury were not keen on the Auckland going early approach because it set a precedent for other Councils. Noting obviously that others will need direct Govt investment as their water rates revenue will be insufficient to cover the cost of the infrastructure work.
One notes that Auckland Council is reported as coming up with this 'deal'.
Really? Who at Auckland Council? What were their motives? Surely not the group that wanted to sell off Watercare?
Like I've said ... It is pathetically easy to privatise public assets - especially at a local level - when deals are done behind closed doors where a picture of 'there is no other way out' has been cultivated.
Three Waters would have protected these public assets for ever!
How come Watercare no longer need to raise rates by 27% under this scenario.
The government and Auckland aren't chipping in and it will now be much more expensive for them to borrow so savings can't be coming from cheaper borrowing?
Is it perhaps that the people lending (essentially the new owners) can see that they can run it into the ground and then buy the whole thing off themselves at a basement bargain rate? Guess what happened when it's fully privatised with all links to AC and govt severed? Just look to the UK where this has already happened. I can't believe Kiwis are so stupid to fall for this.
This is the worst sort of underhand corruption I have seen in my time in New Zealand. If your plan is to privatise, come out and say it and let us decide whether we want it privatised or not. Deceitful and ideologically driven neo-liberalist dogma. Our country is being sold from under us and most people can't even see it.
For watercare there's generally two income streams. Debt, and user chargers.
User charges won't rise 27%, THIS YEAR. Instead this scenario will raise debt, that will be more expensive than the 3 waters scenario.
The more expensive debt will be paid back over time, via USER CHARGES, which will need to rise more.
Over time, we will be paying more. They are putting it on the credit card.
You assume that a) the debt will grow so large that Watercare won't be able to pay it off, b) the Crown won't bail out Watercare if that ends up happening, and c) that the privatisation will look more like Air New Zealand rather than Vector.
The reality is that this is a purely administrative change - where AKL council will be able to get more bang for their buck in terms of debt, and the opposite for Watercare.
In the case where the debt burden will grow too large, the Crown will bail them out just like it does with private entities today. Ruapehu Alpine lifts anyone?
Even if you assume that Watercare fails in five years and is privatised rather than being bailed out, chances are it'll get regulated into the ground by ComCom like EA does with monopolistic lines companies.
The reality is that you don't like this government and would rather see Three Waters back in action. As an Aucklander I don't want my money going to subsidise Wellington's pipes while Iwi make infra decisions nationwide - and judging by how Auckland electorates voted, I'd guess there are quite a few people like me.
No, a lot of assumptions by made by agnostium. They claimed that this legislative change will result in Watercare being privatised, while I beg to differ.
Ironically an increase in their borrowing power will lead to more investment in infra today, while reducing ratepayer costs. The alternatives are either to hike water charges 25.8% next year and pay for all of Watercare's projects or charge the same while cutting projects. The four/ten/however many proposed Three Waters entities would achieve the same thing - an increase in debt availability - while also eliminating accountability, enabling cross-subsidies between local governments, and adding co-governance to top it all off.
As I stated previously, Aucklanders have no intention of paying for Wellington's pipes while they squander their rates away. Under the current scheme some councils have been proactive in creating water services entities while others haven't even been bothered to install meters.
You're right, I don't really like this solution either, but it's workable at least. The real solution is austerity and major cutbacks on vanity projects, but nobody would vote for that and any government or council invoking such measures wouldn't last very long.
Three Waters minus co-governance still introduces cross-subsidies between councils as I alluded to previously, where councils who have managed their water services well are now penalised for doing so, and other councils which have squandered their rates get bailed out while continuing to make similar mistakes across the board.
It removes accountability and would just lead to the same thing happening in another 30 years - only maybe this time it will be something else instead of water.
They've just been given a new credit card with a bigger credit limit and higher interest rate, I don't think that equals more bang for their buck. Just a more expensive buck.
Fair point if you want Auckland to stay separate in this, but it looks sub-optimal even given that requirement.
Auckland council has a debt limit (300% of revenues I think), so they would need to raise charges now as they can't take on more debt. This new entity can take out debt that isn't limited by Auckland Council's debt cap, so can take on more debt and raise rates less now, but the lifetime costs to users will be higher.
Correct - the current limit is 290% with a goal of reducing it to 270%, but that's neither here nor there.
I struggle to see a viable alternative without cutting AKL council projects or raising their debt ceiling. A formal crown guarantee as proposed with Three Waters would transfer the debt onto government books, meaning that the taxpayer rather than ratepayer has to cover it in the future - albeit at a slightly lower APR due to the Crown's higher credit rating.
Whether that's worth it or not is more of a political decision and saying that this legislative change is a move to privatise water assets is incredibly disingenuous. If Crown debt is so good and everything else is inferior, why have local government borrowing at all?
Ah, so you didn't read my first comment above.
May I remind you of a few cases of voluntary bailouts in the past:
BNZ 1990 - $1.3 billion
Air New Zealand 2001 - $900 million
AMI 2011 - $500 million (at least)
Air New Zealand 2021 - $1.5 billion (debt)
Kiwibank 2022 - $2.1 billion
As you can see these are huge sums of money paid out to corporations, by both Labour and National.
I don't see why the same wouldn't be done for Watercare if need be.
What's your point?
We don't need to worry about it being privatised because based on some previous examples the government will bail it out if it gets into trouble?
So why are we paying extra borrowing costs when the government is guaranteeing it anyway?
This is about putting more power into the hands of private interests (the debtors) and removing the safeguards we have to prevent privatisation (the ability for council to bail them out).
I have no issue at all with privatising some public assets. For example council shouldn't be subsidising people who park, sell those assets of already. But water, no thanks. Seen what happens in the UK when you start selling off core services.
My point is that your fearmongering about privatisation is unjustified. If governments have shown willingness to bail out airlines, banks, and insurers - water service entities have nothing to worry about. Privatisation - if you can even call it that - of the electricity industry has also been shown to maintain high levels of regulation and regard for customers, an approach which would likely be mimicked for the water sector should worst come to worst.
You're also not removing the ability for councils to bail them out, just the obligation - key difference. In every single example above there was no obligation of the government doing anything, yet such a choice was made regardless.
The additional cost comes from the usual revenue stream (if everything goes well) being water users and not central government. 130-150bps is significant, but removing (even partially) local control and oversight might cost you more in the long run. As I said, the decision to centralise everything to reduce financing costs is political and very contentious, compounded by the fact that some will benefit at the expense of others depending on where in the country you live.
I don't know about nor do I have any interest in discussing the situation in the UK, since there has never been a real discussion on privatisation by any major party here. Establishing whether or not a situation is even remotely plausible seems like a rational step before determining its potential effects and severity.
"You're also not removing the ability for councils to bail them out, just the obligation"
That isn't what the article says. I have cut and pasted it below, unless I'm missing something ...
"The Government will pass a law which prohibits the city council from providing any financial support to the water entity and requires it to tell lenders it doesn’t have a Crown guarantee.
Auckland Council would retain control of the entity, in that it can still appoint its leaders and set the remit, but it would not be able to contribute to its costs.
This means the council would be unable to intervene if the entity became financially distressed."
Own goal there, not their, but I digress. The debate had nothing to do with businesses being better managed than councils, rather the history of bailouts in the past. My claim is that Watercare will always get bailed out - whether by AKL council or the Crown - no matter what. It's very difficult to fearmonger about privatisation without refuting this, and thus the only responses I've seen thus far are technical in nature such as nitpicking the wording of an announcement about a bill yet to be law.
Three waters - even a watered down version with experts in charge rather than co-governance - isn't supported by many due to the faults I outlined many times, mostly to do with cross-subsidisation and lack of accountability. Not being able to propose a viable approach while spreading misinformation about the dangers of another speaks volumes about what you support and what your end goal is.
Re. Kiwibank, are you saying that the government borrowed billions just for fun? If that's indeed the case, that would be more of an own goal by you - showing that even if a business shows signs of struggling it will get government support immediately.
However the truth is more dire - with Kiwibank's ROE decreasing steadily from 13.4% in FY15 to 6.4% in FY19 - all the while Aussie banks managed to maintain >10%. The Crown acquiring shares of a faltering enterprise is exactly what I'd call a bailout, wouldn't you?
Have to prioritise the debt on government books toward funding tax cuts for property speculators, not to paying less for water infrastructure.
So...Aucklanders have to overall pay more for waters infrastructure to help fund welfarism for property speculators. Government of entitlement mentality.
Because they were being forced to use user charges to directly pay for Capex projects that will last 100+ years, it makes sense to borrow and spread the cost of these projects over a few generations.
what? watercare's structure isn't changing, it's by far the most well run water system of the large cities in NZ, they can always raise water rates to pay back debt. The only reason they would fail is if the council changes tack from the last decade and kills it through poor management and then subsequently refuses to allow a rise in water prices.
I'm also not sure why there is so much pearl clutching regarding private water infrastructure in NZ. Electricity has been nearly fully privatised, it's a very similar model with local monopolies. Nobody can defend the management in the water industry vs electricity. Electricity is run 100x better than water is, prices are falling, the power companies make long term investments and maintain their assets. Meanwhile major councils lose up to 50% of their water to leaks, have literally no plan to make it better, and generally have underinvested for decades.
The only reason they would fail is if the council changes tack from the last decade and kills it through poor management and then subsequently refuses to allow a rise in water prices.
It's more likely they could fail as a result of inability to collect on bad debts (from water users). With Auckland Council managing the entity, do you think they will approve of water services being cut off when payments get behind? Or perhaps we'll see a future where, like electricity supply, a pre-pay system will be implemented.
All that said, I suspect that default on debt by end-users likely happens before the entity itself defaults on its debt.
The most urgent issue on this government's plate to my mind is cost-of-living - and the problem starts with housing/accommodation costs - reticulated serves being but one element of that overall cost.
Having restored landlords ability to claim interest on borrowing as an expense of the business, the time to consider the regulation of the residential rental market is now - and urgent.
That's the one bit of this that annoys me, the price rise should have been a lot more actually.
Watercare have been charging well under what would be required to replace all pipes when they age out since their inception* (directed to do so by council) and their predecessors mostly did the exact same. This is effectively a generational transfer from the young to old as now the kids have to pay back all the depreciation (to renew aged out assets) that previous generations pocketed, plus pay for their own deprecation / renewals.
Prices should have gone up more today for the next decade or so, and then down, to claw back some of that cash from boomers while they're still kicking.
*they're close to charging 100% of yearly depreciation now. Which is good.
Agree. 100% of depcn is good. But depcn is only an estimate of total future renewals costs.
And also, it won't fund growth requirements.
Previously I believe that watercare was topped up by council for big projects like central interceptor.
With the law change, I presume this will be unlawful. Watercare will have to pass on full costs to users. Water bills will start to resemble electricity in magnitude. In some ways a good thing as people will be very careful with usage and it will reduce demand. But i don't think most people will see this coming...
"But depcn is only an estimate of total future renewals costs."
There are two types of depreciation.
Depreciation for tax purposes and what you refer too.
They are seldom even remotely similar. And I'd add that what you refer too - future renewals costs - is often vastly underestimated.
Yes, I agree with your sentiment, sorry if I wasn't clear. I also agree that future renewals costs is underestimated. Although it's interesting cause watercare tends to run a lot of its network to failure. It's knowledge of most pipes is limited, it waits to there's a leak, then will investigate and diagnose. Works ok for smaller volume pipes, but they seem to have applied this approach to more important arms of be network e.g. recent example in Parnell. You can make savings by running to failure way beyond expected life, but do it on the wrong asset and the costs get silly and it's very disruptive. Which is a long way of saying, water bills will go up.
The previous Watercare CEO, who was either fired or asked to resign indicated that Watercares borrowing limits were held back because of its attachment to Akl Council.
This new arrangement frees that connection. The real question to ask does Watercare need to borrow that much? If its for capex, new or renewal that's fine. I take it that no borrowing will be for Opex.
The new CEO, an former mathematician, should be able to do some simple financial calculations.
My take is the older voting block, who it turns out have managed to avoid paying appropriate levels of rates to maintain/enhance core infrastructure have now found a way to partially wash their hands and pass the problem forward to the next generation to fix. Good luck.
“Wellington didn’t need to create complicated new structures that diluted the democratic accountability for water services and they didn’t need to merge us with other councils, whether we wanted to or not.”
“Aucklanders didn’t need to pay for someone else’s bad planning,” he said.
Has he calculated the difference between borrowing costs for a BBB rated entity v those for an AA rated entity?
It's a calculation I can't do, but he should have done. His constituents might well be worse off in paying these higher interest rates for borrowing.
Wayne Brown's 'begger thy neighbour' attitude might well have been a bad strategy for both Aucklanders and Northlanders.
So it's a bit of off the books cooking? But recorded on their ledger but theyre able to enter into financial contractual arrangements with anyone who'll lend them money to finance the project(s)?
How does that actually work? Who's really on the hook if goes tits up?
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